Bank of the Year: How Wells Fargo conquered America

EuroMoney: It’s the most successful bank of the post-financial crisis generation. But alongside numbers that make its rivals green with envy, it maintains a steadfastly old-fashioned approach to the business of banking. Is this what a model modern bank should look like? Or is there more to Wells Fargo than meets the eye? 

With any senior executive from Wells Fargo, it seems, you have to start with the history lesson. That’s certainly the case with the bank’s chairman and chief executive, John Stumpf. On first meeting, he tells how Mr Wells and Mr Fargo opened their first branch in 1852, with a stagecoach business that remains the logo of the bank to this day. Then you get the vision and values bit. How Wells does not have branches; it has stores (in fact at 9,000 distribution points it has considerably more than any other bank in the US). How client needs are paramount – banking is a customer-service business first; you make your money afterwards. Or, as Stumpf puts it with at least a trace of irony: "You don’t put your stagecoach before the horses," before adding a little more portentously: "Before the crisis, far too many companies in our industry put the money first." Tim Sloan, the bank’s CFO, also wants to talk history: he says it gives the bank its long-term focus. "This business is not about tomorrow or the next quarter. We’re the current guardians of a business that dates back more than 160 years. We take that responsibility very seriously." This is even a bank that takes pride in paying its fair share of taxes: at a marginal tax rate of 32% of its income, Wells Fargo promotes the fact that it is the single-largest payer of corporation tax in the US. And yet this rather folksy bank is at the very top of the global banking industry. Stumpf is quick to mention that his stock is at an all-time high; that despite not having one of the 20 largest balance sheets among developed world banks, his is the largest by market capitalization. It’s a title that Wells Fargo has vied for with JPMorgan and HSBC. Stumpf recalls a corporate event in Paris earlier in the year, where he was sitting next to Stuart Gulliver, the chief executive of HSBC. Both were regularly checking their smartphones for each other’s share price. The market capitalization crown was changing hands with each tick up or down in the stocks. Now Wells is the clear leader: its market cap at the end of June was $220 billion. Both JPMorgan and HSBC are around the $195 billion mark. Stumpf likes to coin a phrase: many of them ring true. None more so than the one that sums up Wells Fargo’s success over the past few years: "You make the best loans coming out of a bust, not going into a boom." Since 2009, the US has been coming out of that bust more quickly than many expected. Wells Fargo has ridden its stagecoach right through that recovery. It has generated earnings per share growth in each of the past 13 quarters. It serves consumers and businesses in more communities than any other US bank. It serves one-in-three US households. Some 97% of its business is in the US. Well Fargo’s chairman and chief executive, John Stumpf "We are all-in America," says Stumpf. "We have the best rule of law, the best secondary education, an ability to adapt quickly to circumstances and a can-do spirit where hard work is rewarded." That homespun attitude is at its strongest when it comes to talking about the people who work for Wells Fargo. "The team is the hero here," says Stumpf. "We do not have employees. That term is not used. We are all team members. We are obsessive about long-term relationships." The senior management of Wells Fargo don’t even have contracts. They are all what is termed ‘at will employees’. They could, in effect, leave the bank at any time. Very few do. In fact, the longevity of Wells’ senior management team would put the UK civil service to shame. Stumpf proudly tells how his 10 direct reports have an average of 28 years’ service at the bank. "We know each other’s children and grandchildren," says Stumpf. "We respect each other. We challenge each other as colleagues. Failures come from not challenging the status quo or failing to speak up." It seems the management team are happy, like the rest of Wells’s employees. A Gallup poll of the staff, which takes place every 18 months and is known as the happy-to-grumpy index, showed that the bank’s team members were six times more likely to be on the happy side of the fence than the grumpy side. Of course, the senior management’s good humour is certainly helped by their compensation. In 2012, Stumpf was the best paid CEO in US banking, at $22.9 million – a lot more than most members of the team. That pay comprised $2.8 million in salary, a bonus that included $13.5 million in shares, a $3 million cash bonus, and gains in value of his pension of $3.5 million. Tim Sloan, the CFO, took home $9 million.
David Hoyt, head of the wholesale bank, saw his compensation jump from $10.5 million in 2011 to $12.8 million last year. Lloyd Blankfein, who runs arguably the world’s best wholesale banking division, a business also known as Goldman Sachs, earned just $500,000 more than Hoyt last year. It’s hard to argue with the judgement that these executives deserve to be well paid. Wells Fargo has the best return on equity of any big developed-market bank, at more than 13%. Its return on assets for the first quarter of 2013 was 1.49%. Its market capitalization in 2009 was less than $50 billion. Can the best-run bank in the world really be one where the senior executive team appears to be just that – one that sticks together? Does it really put its customers first? Is Wells Fargo, let’s just say it, as nice as it appears? The answer is that, like every bank, it is ruthless – but in its own way. "We are very focused business people. We are also very consistent in what we do. But our discipline and focus revolves around our relationships with our clients," says Hoyt, a 32-year veteran of the firm. John Stumpf is a post-crisis chief executive from the old school of banking. His father was a dairy farmer in Minnesota. He was one of 11 children. He graduated in the bottom half of his high school and took a job in a bakery, later attending St Cloud State University and, later still, obtaining an MBA from Minnesota State University via night school. His first job in banking was as a repo man. He joined Norwest Corporation in 1982, quickly working his way up to be chief credit officer for Minneapolis. His big leap forward came when, as regional president for Norwest Bank Texas from 1994 to 1998, he led the acquisitions of 30 banks in the state with total assets of more than $13 billion. Stumpf became chief executive of Wells Fargo in 2007, succeeding Richard Kovacevich, the man credited for giving the bank the foundations it relies on today when he merged Wells Fargo with Norwest, the bank he ran at the time. Stumpf also inherited the chairman’s role in 2010 from his predecessor. Perhaps the most important period in the recent history of Wells Fargo was in the years preceding his accession – the sub-prime boom before the sub-prime bust. No US mortgage lender was immune from the fallout. But Wells Fargo avoided the worst excesses in the period from 2003 to 2007. That wasn’t always an easy call, especially for Stumpf. From May 2002 he ran what Wells Fargo calls community banking – what most banks would call the retail bank. So how did Stumpf resist the siren calls to go all-in the sub-prime market while others were claiming they’d found Wall Street’s answer to the gold rush? "I can’t sit here and tell you we saw the bubble coming, but we did believe that these were not the right products for our customers," he answers, in a very matter-of-fact way. "I mean, how can a negative amortization work? How could that possibly make sense?" Stumpf admits it wasn’t easy. He says a lot of his mortgage originators were constantly asking to offer more sub-prime products. Some of those team members left. Wells did lose market share. Wells Fargo was also hit by the fallout. "Today the industry is working hard to rebuild its reputation. We were all painted by the same brush: the pigment in the paint comes from the worst provider," Stumpf acknowledges. Of course, Wells Fargo has been far from immune from the series of legal challenges facing all consumer banks in the US. Just like JPMorgan, Citi and Bank of America, the bank has a lengthy rap sheet of claims settled and outstanding against it. In April 2013, the bank settled a suit with 24,000 Florida homeowners alongside insurer QBE, in which they were accused of inflating premiums on forced-place insurance. In May, Wells Fargo was forced to pay $203 million to settle class-action litigation accusing the bank of imposing excessive overdraft fees on checking-account customers. Also in May, the New York attorney-general, Eric Scheidermann, announced a lawsuit against Wells Fargo over alleged violations of the national mortgage settlement, a $25 billion deal struck between 49 state attorneys and the five-largest mortgage servicers in the US. Schneidermann claimed Wells Fargo had violated rules over giving fair and timely serving. Then, at Wells Fargo’s annual general meeting in April this year, a group of protesters tried to access the main hall to effect a citizen’s arrest on Stumpf, claiming the bank had been guilty of illegal foreclosures, charging higher interest rates based on race, and overcharging on student loans
.

The protesters were escorted from the building, but this is unlikely to have fazed Stumpf. When he was a repo man, one of Stumpf’s earliest tasks was to retrieve a chainsaw from a borrower who was behind on his payments. When he tried to sequester the item, the customer picked up the chainsaw in one hand, and a shotgun in the other, and told him to come and get it. Stumpf decided it was not the time to force the issue. This is a banker who clearly understands risk. Avoiding the worst excesses of sub-prime had many benefits – one in particular. "If we had taken a different strategy, then we might not have had the capital to buy Wachovia," says Stumpf. Wachovia had been much more aggressive than Wells Fargo in the sub-prime market, in commercial real estate, and in the capital markets. It was a bank similar in size to Wells, but on its knees. Tim Sloan, Wells Fargo's CFO Sloan recalls: "We know that our best opportunities to grow have been in times of adversity. Wachovia was a once-in-a-lifetime opportunity." It would give Wells Fargo a unique reach from the west coast to the east coast. But it nearly did not happen. "We were a 150-year-old company being asked to make the most important strategic decision in its history over the course of one weekend," says Sloan. "We could not get through the doors to look at the bank. And we were adamant that we would not take government support to make it happen." Wells Fargo nearly lost out to Citigroup, which before long was having to split itself into a good and bad bank. In the end, Stumpf picked up Wachovia for $15.1 billion in October 2008. That looks a steal now, even if Wells Fargo had to work through the problem loans in the Wachovia portfolio, many of them stemming from Golden West Financial, a pick-a-pay mortgage lender Wachovia had bought in 2006. Wells Fargo has taken the opportunity that Wachovia presented, and taken advantage of the difficulties of many of its competitors to build a position of unique strength in the world’s biggest financial market. It is the leading bank in key areas such as mortgage origination and servicing, commercial real estate lending, small and middle-market business lending, agribusiness lending and auto lending. It is the country’s biggest deposit taker and debit card issuer. It is the fourth-biggest wealth management provider in the US, and a force to be reckoned with in US investment banking and capital markets.

So where does Wells Fargo go from here? Growth is the big issue for Stumpf. He needs the US economy to continue its recovery. Wells Fargo’s overall market share in the US is more than 10%. Whole-business acquisitions are therefore out of the question. Organic growth, together with some purchases of assets or business lines, have to be the way forward. Wells Fargo’s share of the key mortgage market is already on the wane from its highs of 2012. It’s still the market Stumpf cares most about: "A mortgage is the most important transaction a family will ever do. Homes define families." But he says the 30% market share Wells Fargo reached last year was misleading. About half of that share represented the aggregation of smaller loans that were then sold on in the secondary market. Now, its share is closer to 22%; of which eight percentage points is aggregation. Talk is that the US housing market might be recovering too quickly, that there are now localized bubbles in such places as Arizona and Nevada. Stumpf says Wells Fargo constantly monitors 400 metropolitan housing areas and that while many are "coming back, it is in relative terms rather than in absolute values". He says the biggest problem facing the US housing market is a lack of inventory, because of the huge slowdown in housebuilding since the financial crisis. That might, in time, lead to some risk of overheating. Interest margins remained squeezed for all US banks by low interest rates. Stumpf is quick to relay that Wells Fargo has managed to maintain the best net interest margin of all the big US banks, at 3.48%. One factor is that Wells has around $1 trillion in deposits, earning interest of just 15 basis points. He’s just as quick to stress the diversification of the bank’s earning streams, with more than 50% of revenues coming from fee or service income. "That robust portfolio of non-interest business is the real secret of this bank," says Stumpf. He adds that the bank is "very thoughtful" about expenses, and Wells Fargo ought to be able to bring its cost-income ratio down from the current 58.5% to closer to 55%. Stumpf’s biggest problem is that he can’t lend as much as he wants to. Wells Fargo’s loan-to-deposit ratio is 80%. He’d much rather it was closer to 100%. "Even in this low interest rate environment, we are hungry for loans," Stumpf says. "I would love to grow our balance sheet. But we can’t find enough borrowers with the right credit profile.

What about the SME sector, to which Wells Fargo is the biggest lender in the US? "Those companies are doing great. They’re flush with cash. They don’t need to borrow more." Despite his belief that the US market provides unique opportunities, he admits not all is well in his homeland. "America needs a spark and some confidence. Washington is broken," he says. "It is spending too much money. It’s a touch hypocritical to constantly tell the banks that they need to improve their capital and liquidity positions, to get their house in order, when the government itself is struggling to find liquidity and spending more than its means."

Stumpf has also railed against Federal Reserve proposals to force banks to hold more long-term debt. If Wells was forced to do so, it would hit the bank hard as it is funded by deposits to a much greater extent than many of its peers. Wells Fargo’s CEO seems to have taken a much more active role in speaking on behalf of US banks in recent months. There has been a passing of the crown as best US bank to Wells Fargo from JPMorgan; now, it seems, Stumpf has taken up the regulatory baton from Jamie Dimon.

And he can be quite outspoken. For example, he says: "I’ve got $100 billion sitting in the Fed for liquidity purposes earning us absolutely nothing." Through the ever-present smile, the look in Stumpf’s eyes hardens at the mention of this. Wells’s CEO is concerned about the impact that regulation is having on the industry as a whole. "I do worry about the negative consequences of the rules made by well-intentioned people," he says. Wells Fargo is classed as a global systemically important financial institution because of its sheer size, rather than any worldwide business or exposures. The bank’s executives joke that they were a little surprised to be on the Financial Stability Board’s list, even at the lower 1% capital surcharge end of the scale. "We think they probably drew up the list and realized we weren’t on it and thought: ‘Oh, what the hell do we do with Wells Fargo?’" says one. Although it is global in importance, the bank will remain steadfastly American – even when the inevitable time comes and the US is a relatively less attractive market. As Hoyt says: "We know where our strength is. Even when it’s not as great a spot as it is now, it’s still our spot.

by Clive Horwood